In brief - Sale of certain Australian assets by foreign residents to be affected
The Tax and Superannuation Laws Amendment (2015 Measures No. 6) Bill 2015 is currently before the Commonwealth Senate. If passed, the bill will impose on the purchaser of certain Australian assets sold by foreign residents, including real property transactions over $2 million, an obligation to withhold payment of 10 per cent of the purchase price and pay this amount to the Australian Taxation Office.
What real property transactions will attract the withholding payment?
If passed the regime will apply to contracts entered into on or after 1 July 2016 by which the purchaser acquires:
- an asset that is a direct or indirect interest in taxable Australian real property (including land, buildings, residential and commercial property); or
- an option or right to acquire such property or such an interest.
This means that, as well as acquisitions of land, the acquisition of a lease asset by a lessee and foreclosing creditors may also be subject to the withholding payment.
Among other exemptions, the 10% withholding payment will not apply to real property transactions if the value of the real property is less than $2 million or if the vendor is in bankruptcy or under external administration.
Who is a foreign resident? Definitions for individuals and companies
The withholding payment is payable where the vendor is a relevant foreign resident. A foreign resident is a person other than an Australian resident. An individual will generally be deemed to be a resident if they are domiciled in Australia or are present in Australia for at least 183 days of the income year. A company is deemed a resident of Australia if:
- it is incorporated in Australia;
- it carries on a business in Australia and has either its central management and control in Australia; or
- its voting power is controlled by shareholders who are Australian residents.
How will the withholding payment work for Australian assets sold by foreign residents?
The withholding payment obligation requires the purchaser to pay 10% of the first element of the cost base to the Commissioner of Taxation. The first element of the cost base is usually the total purchase price of the asset acquired. The purchaser must then withhold this amount from the payment that they make to the vendor and remit this amount to the ATO.
The payment is due on the day the purchaser becomes the owner of the asset or interest acquired (i.e. settlement). This varies from normal capital gains tax requirements, which are generally backdated to the day the purchaser entered into the contract to acquire the relevant asset or interest.
Obtaining a clearance certificate from the Commissioner of Taxation
Purchasers of real property above $2 million will need to obtain, or ensure the vendor obtains, a clearance certificate from the Commissioner of Taxation. If a clearance certificate is obtained, the purchaser is entitled to rely on the clearance certificate and will not be required to make the withholding payment.
The ATO has advised that clearance certificates should be provided within 1-14 days of making an online application.
Implications for buyers and sellers of property worth more than $2 million
If the purchaser fails to make the withholding payment when it is payable, the existing administrative penalties under the Taxation Administration Act 1953 will apply. As we creep closer to June, purchasers and vendors of real property must consider the implications of the amendment bill when considering drafting agreements in relation to land valued over $2 million.
This is commentary published by Colin Biggers & Paisley for general information purposes only. This should not be relied on as specific advice. You should seek your own legal and other advice for any question, or for any specific situation or proposal, before making any final decision. The content also is subject to change. A person listed may not be admitted as a lawyer in all States and Territories. © Colin Biggers & Paisley, Australia 2023.